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The House Committee on Financial Services titled “Assessing the Madoff Ponzi and the Need for Regulatory Reform” is beginning, with the SEC’s inspector general, David Kotz, scheduled to appear before the committee, along with SIPC general counsel Stephen Harbeck. Expect much in the way of bloviation—MarketBeat plans on sitting on the first hour of this, and then perhaps popping in on occasion after 3 pm.

2:13 pm ET: Apparently there’s quite a bit of banter here about how this really isn’t a real meeting, but an informal meeting. Paul Kanjorski, (D, Penn.) starts by saying that the meeting is to figure out how Bernard Madoff managed to do all that he did. “We need to understand how Mr. Madoff organized his many business operations and how he perpetrated his alleged fraudulent acts,” he says. He adds that this should have been detected earlier, of course, and this “slipped through the cracks.” Cracks the size of the Grand Canyon, perhaps. (Or as Kara Scannell wrote in today’s WSJ, “The situation is even more awkward because SEC examiners seemed to be looking in the right places, yet still were unable to unmask the alleged scheme.”

2:19 pm: The number of investment advisors subject to the commission’s oversight has doubled since 1997, Kanjorski says. “Sometimes our overzealousness has caused a major problem,” he says, suggesting that appropriation cuts and fees to the SEC of about $14bn back in 2001 was a big reason for what’s going on. He blames the Republicans, and then says he’s not blaming the Republicans. “All of us better check our memories and remember what we did in the last 12 or 15 years…those of us responsible for oversight missed the boat,” he says.

2:23 pm: Rep. Spencer Bachus (R., Ala.) is having his turn, and logically, his first order of business is to defend what the GOP did in 2001 against what Kanjorski says. “This is not a question of funding,” he says. (We’re really solving problems here.) He adds that what is needed is a “statutory and regulatory structure for the 21st century.” Of course, the 1930s-era rules that were jettisoned might have worked, too, but never mind. He suggests the possibility of “harmonizing” the regulations between broker/dealers and investment advisors.

2:31 pm: Rep. Barney Frank (D., Mass.) gets his turn. He’s talking about structural flaws of the SEC, rather than the SEC’s rank-and-file, and now he’s back to talking about the lack of funding the SEC had. Given that this started 10 minutes late, this is now 25 minutes along, and we’re getting nowhere.

2:37 pm: It’s Ron Paul’s turn. The Texas Republican says that regulatory agencies can’t pre-empt people from doing bad things, and instead, they give people a force sense of security. “The problem comes because people commit fraud, and fraud laws were on the books…adding on new regulations and spending millions and millions is not good… it contributes to it,” he says. He’s now saying that it’s the government at fault, calling the Social Security System a Ponzi scheme of its own, and advocates getting rid of the monetary system and the SEC entirely, and focusing on self-reliance. (Note: This hasn’t worked out so well in the last few years.)

2:41 pm: Gary Ackerman (D, N.Y.) is up, for two minutes. MarketBeat believes these hearings would work out better if the individual members were not allowed to speak other than to ask questions. He’s lamenting the travesty of all of this.

2:44 pm: It’s Donald Manzullo’s turn. (He’s a Republican from Illinois.) He’s saying “the red flags were there and people didn’t do their jobs…how do we know they’ll do their jobs in the future by throwing money” at the problem. He says the issue is with the myriad organizations that are “supposed” to be protecting the investor. That’s true enough.

2:46 pm: Brad Sherman of California, a Democrat, notes that former Chairman Arthur Levitt suggests that the SEC should be a law enforcement agency. He’s also the first to mention that Mr. Madoff’s broker/dealer operation (not just the advisor division) “filed annual statements showing $17 billion in assets and a one-man accounting firm,” and says that the SEC missed what was in front of its collective face.

2:49 pm: Scott Garrett (R, N.J.) is up. He suggests changing the name of the Ponzi Scheme to the Madoff Scheme. What a wonderful suggestion. He’s now blaming the media for portraying the victims as only the wealthy (really?), and he’s castigating those who want more regulation, noting that hedge funds were victims too. How this makes the point we’re not sure. He also does not believe an outside regulator could have caught a scheme that even Mr. Madoff’s sons were not aware of (though, of course, we don’t know if that’s true either).

2:53 pm: We must be down to the junior members of the committee, starting with Carolyn Maloney, Democrat of New York, because she only gets one minute to speak, as opposed to the two minutes allotted the previous talkers. This is a pleasing structure, and would be better if everyone was given 10 seconds. “This is a serious blow to investors’ confidence at a critical time,” she says, and thanks everyone for being there.

2:54 pm: Dean Heller (R., Nev.) has three minutes to speak. What happened to the one-minute time limit? No matter. MarketBeat is taking a break at 3 pm, because this is going nowhere. He mentions the Dallas Mavericks for some reason. He’s laying the blame at the SEC, state regulators, and individual investors, too, for not doing their own due diligence.

2:56 pm: Greg Meeks, Democrat of New York, is up. (There are a lot of people from New York.) “We’re dealing with a crook — an individual who took people’s money, and lost it! He’s a crook. He deserves to go to jail. To the degree we can make any individuals whole…we need to figure out how to get that done.” He wants to know if there’s something we can learn from it to prevent it from happening again — particularly in the area of strengthening the laws, rather than getting rid of them. He says if people in the SEC were complicit, they need to go to jail, too. (He’s sending a lot of people to jail here.) “If we find through the hearing that there were new rules and regulations we can put in place so that no one else is scandalized again, our JOBS is to do that,” he says. He advocates listening, learning, and evaluating, and gets credit for jolting everyone in the hearing awake.

2:59 pm: We’re still on opening statements, and this committee has dozens of members. So perhaps we’ll be back.

3:33 pm: Rep. Bachus is questioning the SEC’s inspector general, David Kotz, and trying to find out what documents he’s looking to obtain. He wants them to ask for documents related to contractors or “related parties” to Mr. Madoff. Mr. Bachus also points out the “odd custodial relationship” in Mr. Madoff’s firm; Kotz says he’s looking into it. He’s looking into a lot of different things, it seems. His role seems to be to agree with whatever committee members are saying, and then say he’s looking into it.

3:36 pm: Bachus is getting into the options strategy now, wondering whether the SEC has people schooled in trading strategy. Kotz? He comes back and says it’s something people should have. What a confidence-builder.

3:43 pm: Kanjorski has the mic now, asking Kotz about certain gaps in the Public Company Accounting Oversight Board (abbreviated the PCAOB) authority that would have prevented this from happening. Mr. Kotz? He says if there are gaping holes, they will look into them, and present that in their report. You could record his responses and play them back by now.

3:44 pm: Maloney asks about the lack of separation between Madoff and the brokerage group, and then asks about the “tiny and unknown” auditor. Kotz agrees, yet again—saying that they’ll look into what rules they can suggest. She then butchers the name of a former Barron’s reporter, mentioning a 2001 article that raised a few warnings about Madoff. “Why in the world didn’t anyone respond to these allegations?”

“That’s exactly what I intend to find out,” Kotz says. “We have to see if the SEC examiners were aware of the articles, read the articles…” Good Lord.

3:48 pm: Finally, Maloney says the whole performance of the SEC is pathetic. “What additional authority should be given to other regulators to provide a better safeguard against agency failure from the SEC?” She then throws out 9/11, saying that unlike that tragedy, this could have been prevented. Kotz, again, says his efforts will be to find out what happened.

3:51 pm: Ron Paul is up now, saying he’s taking it a step further, that the system cannot work. He posits that the SEC helped prolong the Depression, and says again that it obviates investors of their responsibilities. He then says something about the least-safe places in America being the areas with the most policemen (check out the crime rates in New York, Mr. Paul). Does he have a question? MarketBeat isn’t sure. He’s moved on to the First Amendment, and finally circles around to his question, wondering whether Kotz has any question about whether more regulation is the right answer.

Instead, Mr. Paul suggests that perhaps we need to work toward a “determination to prevent fraud.” (This sounds as much like a fantasy as the power of an all-seeing government.) Kotz says he has no “preconceived notions,” not thinking that increased regulation is necessarily the answer. (Basically, he punts.) Mr. Paul wants to know about the SEC’s budget, and where the money went if more enforcement people were not hired — but Kotz says this isn’t his area. And now, MarketBeat will step out.

—Posted by David Gaffen

—The blog is available at http://blogs.wsj.com/marketbeat/2009/01/05/live-blogging-the-house-hearing-on-madoff/trackback/